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Shell is stepping out of a mega project with Gazprom

Printed below is an English translation of an article published today by the Dutch FT, Financieele Dagblad.

Shell is stepping out of a mega project with Gazprom

By Joost Bosman

Energy group Shell is withdrawing from the construction of an LNG plant on the Russian Baltic coast. The Russian partner Gazprom announced at the end of March that, in addition to the installation, it would also like to build a factory that can process fat gas from Western Siberia. The Anglo-Dutch oil company does not feel like that.

“Following Gazprom’s announcement on March 29 about the final development concept of Baltic LNG, we decided to stop our involvement in this project,” said Cederic Cremers, President of Shell Russia, in a statement.

He adds that other joint projects with Gazprom, already settled in 2015, are not endangered by the decision of Shell.

Because no contracts had yet been signed for the LNG installation on the Baltic coast, there are no financial consequences for Shell.

Borrowing is difficult for Gazprom

Gazprom does have a problem. The costs for the Baltic lng amount to more than € 10 billion, which the Russian state gas company must now cough up. Borrowing on the international credit market is virtually impossible due to Western sanctions – imposed in part because of Russia’s aggression in Ukraine.

According to business newspaper Kommersant, that € 10 billion was calculated too optimistically, since the plans now provide for larger installations and Gazprom has not included a number of costs, including for gas transport, in its calculation.

Moreover, it will miss the technology that Shell needs. Shell also wanted to use the technology that it had developed specifically for the Sakhalin 2 project (on the Russian island of the same name in the east of the country) for Baltic lng. In February it had set up a joint venture with Gazprom to help Shell’s lng knowledge develop Russia’s own technology.

Pressure from Washington

The cooperation also had to protect Russia from new sanctions by the United States in the area of ​​lng, a sector in which only a handful of players (in addition to Shell, Exxon and Total) have the key technology. Washington continues to put pressure on European countries and companies to refrain from oil and gas deals with Russia.

In this way, it wants to make Europe less dependent on Russia for using oil and gas exports as a political pressure. Moscow claims the opposite: the US wants to get rid of Russian raw materials to sell their own supplies (especially shale gas) in Europe.

New partner is from Russia

Gazprom announced that, after Shell leaving, it would immediately start working with a new partner for the project, Russian Rushgazdobytsja (“Russian gas extraction”). That company has no experience whatsoever with major projects like this, but was founded by Arkadi Rotenberg, an old friend of President Vladimir Putin.

Thanks to Rotenberg’s close ties with the Kremlin, his companies have been able to count on the most expensive building projects in Russia for almost two decades. The question is, however, whether the Rushgazdobytsja can compensate for the loss of technical knowledge of a company such as Shell, which has been pocked and razed in such jobs.

Immense amount of gas

And it is quite a chore: the Baltic LNG project and the new gas processing complex in Oest-Loega are going to absorb around 45 billion cubic meters of gas on an annual basis. That is the annual amount that consumes the whole of France.


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